No, Wall Street Is Not Going To Pay $50 Billion More Over The Financial Crisis

Banks are using the government’s flawed settlement with JP Morgan (JPM) to calculate their likely legal bills stemming from mortgage market abuses tied to the financial crisis, signaling that the same misrepresentations about the costs of that settlement could soon spread across the rest of Wall Street.

While the banks say they expect a combined $50 billion in further settlement costs, the actual price tag is likely to be dramatically lower thanks to the tax deductions and other inflating factors featured in last fall’s settlement with JPM. According to the government and the bank, the price tag on the JPM deal was $13 billion, a larger sum than any company had ever paid in a legal deal with the feds. The news that banks are basing their expectations on the JP Morgan deal isn’t surprising since the government has been explicit about using that deal as a template for future settlements.

But almost all of that was tax deductible, and $4 billion of the total was not actually payments, but credit toward its punishment for taking “consumer relief” actions that were already in its financial best interests. The deal let prosecutors appear to be getting tough on Wall Street around the five-year anniversary of the financial crisis, but it will really only cost the bank less than half of the price tag touted by the government and lamented by the bank’s attorneys.

Like the deal with JPM, the $50 billion figure gives the appearance of a major crackdown — the kind of broad effort Attorney General Eric Holder promised at the end of last summer after years of criticism that the Justice Department had been too soft on Wall Street abuses and failed to pursue financial crisis wrongdoing cases against “too big to jail” banks — without actually offering a meaningful penalty for the industry. Holder has denied that the banks are too big to jail, but his department also has a track record of exaggerating its accomplishments with regard to the financial industry. At one point, Holder claimed credit for five times as many criminal charges relating to mortgage fraud as had actually been initiated on his watch. (In contrast with the administration’s lax financial crimes enforcement, all seven women who protested at Justice Department headquarters and at the offices of the Wall Street law firm where Holder and some of his top staff worked prior to serving President Obama faced prosecution.)

The real price tag for coming action against Wall Street is likely to be closer to $20 billion than $50 billion, using the JP Morgan deal as a guide. But even if they were made to pay the full amount reported by the Times, it would be a rounding error compared to the cost of the crisis these banks helped to inflict upon the American and global economies. At a bare minimum, the crisis cost $6 trillion, and a fuller accounting of the fallout puts the number closer to $20 trillion — or roughly 400 times the inflated Wall Street costs figure reported this week by the Times.

If Sens. Elizabeth Warren (D-MA) and Tom Coburn (R-OK) get their way, however, the government won’t be able to continue overstating its victories with the banks. Their newly-proposed Truth in Settlements Act would prohibit exactly the sort of misleading claims that surrounded the JPM deal last fall.